Cvs Health Corporation · NYSE:CVS
Cvs Health — Q3 2017 Earnings Presentation
40 slides from Cvs Health's earnings presentation, Nov 6, 2017
Slide 1: Third Quarter 2017 Earnings Conference Call
Third Quarter 2017 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer November 6, 2017
Slide 2: Forward-looking Statements
Forward-looking Statements This presentation contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current views related to our future financial performance, future events and industry and market conditions. Forward-lookin
Slide 3: Third Quarter Business Update
Third Quarter Business Update © 2017 CVS Health
Slide 4: Third Quarter: Continued Solid Results
Third Quarter: Continued Solid Results Q3 2017 Change vs. Q3 2016 Consolidated net revenues $46.2 billion 3.5% Adjusted operating profit $2.5 billion (13.1%) Adjusted EBITDA $3.1 billion (10.5%) Adjusted EPS $1.50 (8.4%) Free Cash Flow $2.4 billion (35.7%) 4 © 2017 CVS Health
Slide 5: Hurricane Impact and Recovery
Hurricane Impact and Recovery • Approximately 925 of our stores closed for some period of time; 11 remain closed • Financial impact estimated to be ~ $55 million; costs primarily in Retail/LTC to cover insurance deductibles • In advance of the storms, our proprietary messaging platform helped ensure
Slide 6: Agreement with Anthem to Support IngenioRx
Agreement with Anthem to Support IngenioRx • Signed 5-year agreement to provide services to support Anthem’s new PBM, IngenioRx, beginning in January 2020 • We will manage claims processing and prescription fulfillment through mail order and specialty pharmacies – Services will be private labeled to
Slide 7: 2018 Selling Season Seeing Good Progress
PBM Business: 2018 Selling Season Seeing Good Progress • Gross wins of ~ $6.0 billion • Net new business of ~ $2.3 billion - Does include the previously-announced loss of the FEP specialty contract - Does not include any impact from our individual Med D PDP - To date, completed ~ 90% of our client r
Slide 8: Performance-based Pharmacy Network Anchored by CVS Pharmacy and Walgreens
PBM Business: Performance-based Pharmacy Network Anchored by CVS Pharmacy and Walgreens • New 30,000-store performance-based pharmacy network that will be anchored by CVS Pharmacy and Walgreens, along with up to 10,000 community-based, independently-owned pharmacies • The network is an innovative so
Slide 9: Specialty Pharmacy
PBM Business: Specialty Pharmacy • In Q3, specialty revenues increased 10.6% • The rate of revenue growth has slowed due to several factors: – Lower levels of inflation on specialty drugs, consistent with the marketplace – Increase in generic dispensing within specialty • Decreases revenue but benef
Slide 10: Medicare Part D
PBM Business: Medicare Part D • In total, Caremark currently serves ~ 12.5 million Med D beneficiaries – 4.5 million captive lives in our individual PDP, SilverScript – 1.0 million captive EGWP lives – 7.0 million lives through our health plan clients • As mentioned last quarter, SilverScript qualif
Slide 11: Q3 Pharmacy Revenue and Script Growth
Retail/LTC Business: Q3 Pharmacy Revenue and Script Growth (1) • Total same-store sales decreased 3.2%, slightly better than expectations • Pharmacy same-store sales decreased 3.4% - Negative impact of ~ 435 bps due to recent generic introductions • Pharmacy same-store prescription volumes increased
Slide 12: Partnering With All Payors
Retail/LTC Business: Partnering With All Payors • As we look to return to healthy growth, we continue to be very focused on partnering with all payors to drive volumes and capture share ̶ Partnerships with Optum, Cigna, and Express Scripts have seen some uptake from clients and pipeline remains prom
Slide 13: Q3 Front Store Revenue and Gross Margin
Retail/LTC Business: Q3 Front Store Revenue and Gross Margin • Front store comps decreased 2.8% – Adjusting for the Easter shift, front store comps sequentially in line with Q2 comps – Reflects a number of factors, including decision to rationalize promotional strategies • Personalization and promot
Slide 14: CVS MinuteClinic
Retail/LTC Business: CVS MinuteClinic • Operate 1,129 clinics across 33 states and Washington, D.C. • Q3 revenues up 0.7% vs. LY • MinuteClinic providers have now conducted 38 million patient visits • MinuteClinic continues to play a pivotal role in the Transforming Diabetes Care program launched by
Slide 15: Real Estate Update
Retail/LTC Business: Real Estate Update Locations at end of Q2 9,700 Opened 56 Closed (5) Retail locations at end of Q3 2017 9,751 Net new locations 51 Relocations 5 Retail locations with pharmacies 9,703 (1) 1. Including 8,016 CVS Pharmacy stores that operated a pharmacy and 1,687 pharmacies locate
Slide 16: Fighting the Opioid Abuse Epidemic
Retail/LTC Business: Fighting the Opioid Abuse Epidemic • In September we announced an expansion of our enterprise-wide innitiatives to fight the epidemic, leveraging national presence of CVS Pharmacy with capabilities of Caremark • Over past few years, we’ve been focused on prevention, collection,
Slide 17: Third Quarter 2017 Financial Review
Third Quarter 2017 Financial Review © 2017 CVS Health
Slide 18: Capital Allocation
Financial Update: Capital Allocation • Paid ~ $511 million in dividends in Q3; $1.5 billion year-to-date – 12-month trailing dividend payout ratio of 39.6% (1) – Ratio is artificially high due to some expenses that are more temporary in nature, as described in our non-GAAP reconciliations on our web
Slide 19: Free Cash Flow
Financial Update: Free Cash Flow • Year-to-date, have generated nearly $7.0 billion of free cash - Strong YTD performance, abnormally high due to a buildup of a payable to CMS associated with current Med D plan year as well as timing of receipts - In Q4, expect negative cash flow due to settling the
Slide 20: Earnings per Share
Q3 2017 Income Statement: Earnings per Share • Q3 Adjusted EPS of $1.50, at the high end of guidance range – Retail/LTC segment declined more than expected, primarily driven by the effects of the recent hurricanes • Excluding the impact of the hurricanes, Retail/LTC’s profit was within expectations
Slide 21: Revenues: Consolidated, PBM
Q3 2017 Income Statement: Revenues: Consolidated, PBM • Consolidated revenues of ~ $46.2 billion, up 3.5% vs. LY • PBM revenues of $32.9 billion, up 8.1% vs. LY – Growth was 40 bps below the low end of guidance, primarily driven by lower than expected volume – Year-over-year growth driven by increas
Slide 22: Revenues: Retail/LTC
Q3 2017 Income Statement: Revenues: Retail/LTC • Retail/LTC revenues of $19.6 billion, down 2.7% vs. LY – Better than expectations due to stronger than expected pharmacy same store sales and script growth despite network changes – Retail/LTC GDR of 87.2%, up ~ 140 bps vs. LY 22 © 2017 CVS Health
Slide 23: Gross Profit Margin: Consolidated, PBM
Q3 2017 Income Statement: Gross Profit Margin: Consolidated, PBM • Consolidated adjusted gross margin of 15.4%, down ~ 135 bps vs. LY, primarily driven by mix shift, as lower-margin PBM is growing faster than Retail/LTC • Consolidated adjusted gross profit dollars decreased 4.9% – Decrease primarily
Slide 24: Gross Profit Margin: Retail/LTC
Q3 2017 Income Statement: Gross Profit Margin: Retail/LTC • Retail/LTC adjusted gross margin of 29.0%, down ~ 25 bps vs. LY – Decrease primarily driven by lower reimbursement rates – Partially offset by increasing generic dispensing rate and increased front store margin • Retail/LTC adjusted gross p
Slide 25: Operating Expenses and Margin
Q3 2017 Income Statement: Operating Expenses and Margin • Consolidated: adjusted expenses were 10.0% of revenues …~ 35 bps improvement vs. LY • PBM: expenses were 0.9% of revenues … ~ 25 bps vs. LY improvement – Operating expenses declined within the PBM by $46 million, primarily driven by realizati
Slide 26: Operating Profit and Margin
Q3 2017 Income Statement: Operating Profit and Margin • Consolidated – Adjusted operating profit decreased 13.1%, in line with expectations – Adjusted operating margin of 5.4%, down ~ 105 bps vs. LY • PBM – Operating profit decreased 7.2%, in line with expectations – Operating margin of 4.1%, down ~
Slide 27: Below-the-line
Q3 2017 Income Statement: Below-the-line • Net interest expense of $245 million, ~ $8 million lower than LY – Driven by debt reduction in prior year and a lower average interest rate on the debt that remains outstanding • Adjusted effective tax rate of 37.9% – Better than expectations, primarily dri
Slide 28: 2017 Guidance
2017 Guidance © 2017 CVS Health
Slide 29: Enterprise Outlook
Guidance: 2017 Full-year Enterprise Outlook Full-year 2017 Net Revenue Growth 3.25% to 3.75% Adjusted Operating Profit Change (5.75%) to (5.0%) Operating Profit Margin Moderate decline Adjusted EPS $5.87 to $5.91 Year-Over-Year Change 0.5% to 1.25% GAAP Diluted EPS $4.98 to $5.02 29 © 2017 CVS Healt
Slide 30: Healthy Growth in PBM
Guidance: 2017 Full-year Healthy Growth in PBM Full-year 2017 Net Revenue Growth 8.0% to 8.5% Total Adjusted Claims 1.77 billion to 1.79 billion Adjusted Gross Profit Margin Modest decline Adjusted Operating Expense Modest improvement (% of revenue) Adjusted Operating Profit Growth 6.0% to 6.5% Oper
Slide 31: Retail/LTC Outlook
Guidance: 2017 Full-year Retail/LTC Outlook Full-year 2017 Net Revenue Change (2.75%) to (2.25%) Same-store Sales (1) (3.25%) to (2.75%) Same-store Adjusted Scripts (1) (2) Flat to 0.25% Adjusted Gross Profit Margin Modest improvement Adjusted Operating Expense Notable deterioration (% of revenue) A
Slide 32: Consolidated Income Statement
Guidance: 2017 Full-year Consolidated Income Statement Full-year 2017 Corporate Segment Adjusted $945 million to $950 million Expense Intercompany Eliminations ~ 12% (% of combined segment revenues) Adjusted Gross Profit Margin Notable decline Adjusted Operating Expense Modest improvement (% of reve
Slide 33: Consolidated Income Statement
Guidance: 2017 Full-year Consolidated Income Statement Full-year 2017 Net Interest Expense ~$1 billion Adjusted Effective Tax Rate ~ 38% Weighted Average Shares ~ 1.02 billion Consolidated Amortization ~ $820 million Consolidated D&A ~ $2.5 billion 33 © 2017 CVS Health
Slide 34: Enterprise Revenue and Earnings per Share
Guidance: 2017 Q4 Enterprise Revenue and Earnings per Share Q4 2017 Net Revenue Growth 2.50% to 4.25% Adjusted EPS $1.88 to $1.92 Year-Over-Year Growth 10.0% to 12.5% GAAP Diluted EPS $1.75 to $1.79 34 © 2017 CVS Health
Slide 35: Pharmacy Retail/LTC
Guidance: 2017 Q4 Segment Performance Q4 2017 Net Revenue Change (2.25%) to (0.5%) Retail/LTC Same-Store Sales (1) (2.75%) to (1.0%) Same-Store Adjusted Scripts (1) (2) 1.0% to 2.0% Adjusted Operating Profit Change (3.5%) to (1.0%) Pharmacy Net Revenue Change 6.0% to 7.75% Services Operating Profit
Slide 36: Free Cash Flow
Guidance: 2017 Full-year Free Cash Flow (billions) Full-year 2017 Operating Cash Flow $7.7 to $8.6 Gross Capital Expenditures ($2.0) to ($2.5) Sale-leaseback proceeds (1) $0.3 to $0.3 Net Capital Expenditures ($1.7) to ($2.2) Free Cash Flow $6.0 to $6.4 Year-Over-Year Change (26%) to (21%) 1. CVS He
Slide 37: The CVS Health Value Proposition
The CVS Health Value Proposition We have always been focused on making pharmacy and everyday healthcare better for patients, but we know there’s more to be done: • Leveraging our comprehensive network to serve patients – 9,700 retail pharmacies in local communities across the country – Sophisticated
Slide 38: The CVS Health Value Proposition
The CVS Health Value Proposition • For patients who prefer to get medications immediately, walking into CVS Pharmacy is the fastest way – Our pharmacists are readily available to provide counseling, answer questions, and get a prescription into a patient’s hands in 15 minutes • For others, our mail
Slide 39: The CVS Health Value Proposition
The CVS Health Value Proposition • Given that medication costs are a concern for all patients, we use deep connections with PBMs and insurance providers to help patients maximize their insurance benefit – Use clinical expertise to find lowest-cost therapeutically-equivalent option on their plans – 5
Slide 40: The CVS Health Value Proposition
The CVS Health Value Proposition • We continue to invest in our digital properties – Our highly-rated retail mobile app helps consumers manage when and how they want to receive their medications, set reminders, and manage medications for their families all in one place • To date, the CVS Pharmacy ap